“On average, mortgage holders have been refixing onto lower rates,” RBNZ said in its latest monetary policy statement.
“In recent months, around 55% of new mortgages have been fixed for periods of longer than one year,” it said.
“If mortgage rates increase over time, consistent with current market pricing for wholesale rates, then mortgage holders will likely be refixing onto higher rates on average by March 2027.”
RBNZ’s own projections are that there’s still some chance of a rate hike sooner, but that the official cash rate (OCR) will have risen from 2.25% currently to 2.5% by the end of September.
Financial markets have interpreted the statement as meaning the hike will be sooner than later – the New Zealand dollar jumped about 0.4 US cent on the statement.
The central bank noted fixed mortgage rates for terms between six months and five years have increased by between five and 40 basis points since February.
However, it said the spread between the two-year swap rate, from which two-year fixed mortgages are priced, and two-year mortgages fell by about 20bp to about 170bp and said spreads have “decreased to historically low levels outside of the covid-19 period.
Retail rates do tend to lag the more volatile wholesale interest rates.
“Market contacts have noted that the uncertain outlook for monetary policy and volatile financial market conditions are likely contributing to additional caution from banks to fully pass recent increases in wholesale rates through to mortgage and deposit rates.”
Another factor contributing to lending rates increasing by less than wholesale rates is that the estimated relative cost of new bank funding has fallen since February, RBNZ said.
“This largely reflects deposit rates increasing by less than wholesale rates and the relative cost of wholesale funding not increasing materially despite the conflict in the Middle East.”
RBNZ expects a weaker economy because of the war on Iran and that higher fuel prices are reducing real incomes and household purchasing power.
That has led to lower spending by households and a weak housing market with people reducing both consumption and investment.
“Higher mortgage rates may limit households’ willingness to take on new lending and uncertainty about the labour market may lead to more cautious behaviour,”
“Many households will respond to higher living costs and uncertainty by reducing their spending on non-essential goods and services.
RBNZ expects rising mortgage rates will dampen house price growth and reduce the incentive to build new houses.
The central bank noted a key difference between now and the last oil shock in February 2022 when Russia invaded Ukraine is that demand now is softer and households are less resilient.
Search
